Schweppes lifts prices by 4pc

Rising costs have forced Australia’s second largest soft drink bottler, Schweppes, to raise prices, signalling an end to a long-running price war that has taken the fizz out of margins at
Coca-Cola
Amatil.

Schweppes has raised prices in the route trade by 4 per cent and has cut back the depth of promotions in supermarkets, citing higher costs for aluminium, PET and PVC plastics, utilities and distribution, according to a Citigroup report on Monday.

Coca-Cola Amatil is expected to follow suit and raise prices this month to recover an estimated 2.5 to 3 per cent increase in cost of goods this year.

Citigroup analyst Gino Rossi believes the shelf price rises and less aggressive discounting auger well for CCA and could take some of the pressure off margins after a tough year in 2013.

CCA is due to release full-year results next Tuesday and analysts expect Australian beverage earnings to fall almost 9 per cent to around $570 million - the lowest level since 2010 - after a 5 per cent fall in volumes.

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Group earnings before interest and tax are forecast to fall around 6.5 per cent to $836 million, in line with the company’s -5 to -7 per cent guidance, and group net profit (before one -off items) is expected to fall 7.5 per cent to around $516 million.

CCA was unable to raise prices to cover a 1.7 per cent increase in cost of goods last year and is believed to have lost market share in the supermarket channel as Schweppes cut prices to boost sales of Pepsi Next.

Price margins

The price gap between CCA’s core products and those of Pepsi/Schweppes has risen from 30 per cent in 2004 to 50 per cent last year, taking a toll on CCA’s volumes.

Schweppes is trying to grow its market share through aggressive discounting in the route trade and supermarkets.

However, analysts believe the strategy has led to weaker-than-expected earnings and returns at Schweppes and is unsustainable in the longer term.

Japanese brewer Asahi paid $1.8 billion for Schweppes in 2009 and has ambitious targets to grow sales, margins, earnings and market share.

According to Citigroup, Asahi wants to lift Schweppes’s margins to 10 per cent by 2015, compared with just 2.7 per cent in the first half of 2013.

“Schweppes’s pricing in the second half of 2013 has been stronger, perhaps reflecting an attempt to meet this guidance," Mr Rossi said.

“To achieve its 10 per cent margin guidance, we expect the company will need to deliver an additional $61 million in underlying earnings improvement...in order to achieve this, we expect Schweppes will have to deliver reasonable pricing growth," he said.

Coca-Cola’s Australian advantage

CCA’s cost increases are lower than those at Schweppes because CCA pays for soft drink concentrate in Australian dollars rather than US dollars and hedges its commodity and currency exposure.

Schweppes’s cost of goods are estimated to have risen 3.4 per cent in 2013 but its prices rose only 0.8 per cent, Mr Rossi said.

Schweppes and Coca-Cola Amatil were not immediately available for comment.